The banking scenario in India has gained all the momentum, with both the domestic and
international banks meeting its pace. The Indian banks have shifted their approach to
'cost', determined by revenue minus profit. This shows that all the resources need to be
used efficiently to better the productivity and ensure a positive situation. It is very much
essential for the Indian banks to focus on cost saving for its survival. Initially, banks
focused on the 'revenue' model which is equal to cost plus profit. Post the banking
reforms, banks shifted their approach to the 'profit' model, which meant that banks aimed
at higher profit maximization.
Banking industry is currently in a transition phase. On the one hand, the PSBs, which are
the mainstay of the Indian Banking system, are in the process of exceeding its
manpower, excessive non Performing Assets (NPAs) and excessive governmental
equity, while on the other hand the private sector banks are consolidating themselves
through mergers and acquisitions. PSBs, which currently account for more than 78
percent of total banking industry assets are loaded with NPAs (a mind-boggling Rs 830
billion in 2000), falling revenues from traditional sources, lack of modern technology and
a massive workforce while the new private sector banks are forging ahead and rewriting
the traditional banking business model by way of their sheer innovation and service. The
PSBs are of course currently working out challenging strategies even as 20 percent of
their massive employee strength has dwindled in the wake of the successful Voluntary
Retirement Schemes (VRS) schemes. The private players however cannot match the
PSB's great reach, great size and access to low cost deposits. Therefore one of the
means for them to combat the PSBs has been through the merger and acquisition (M& A)
We believe that RBI, which recently increased the CRR by 75 bps beating the street
expectations of 50 bps, to 5.75%. They also hiked reverse repo by 25 bps in order to
moderate the inflation. Along with that they also hiked repo rate by 25bps. It will result in
better C/D ratio and margins. Deterioration in the asset quality has largely started to
moderate. If this trend continues, lower slippages across the sector would suggest strong
case for upward revision in the earnings estimates of the banks.
A variety of financial intermediaries in the public and private sectors participate in India's
Financial sector, including the following:
1). Commercial Banks;
2). Non-bank finance companies, including housing finance companies;
3). Long-Term lending Institutions;
4). Insurance Companies; and
5). Mutual Funds.
There are 171 scheduled commercial banks in the country with a network of 81090 branches
serving approximately Rs. 41,01,518 crore in deposit accounts and Rs. 28,81,898 crore in loan
Public Sector Banks
This includes the State Bank of India and its six associate banks, 19 nationalised banks and IDBI
Bank Limited, 86 regional rural banks. Public sector banks have 56,574 branches, and account
for 74.2% of the outstanding gross bank credit and 74.3% of the aggregate deposits of the
scheduled commercial banks.
Non-Bank Finance Companies
The primary activities of the non-bank finance companies are consumer credit, including
automobile finance, home finance and consumer durable products finance, wholesale finance
products such as bill discounting for small and medium-sized companies.
Long Term Lending Institutions
These institutions provide fund-based and non-fund-based assistance to industry in the form of
loans, underwriting, direct subscription to shares, debentures and guarantees. In addition, long-
term lending institutions also offer:
• fee-based activities such as investment banking and advisory services; and
• short-term lending activity including corporate finance and issuing working capital loans.
There are 45 companies registered with IRDA (Insurance Regulatory and Development Authority)
in India. The total number of life insurers with IRDA is 23, while the total number of general
insurers registered with IRDA is 22. The Indian Insurance sector is open for foreign and private
participation by permitting foreign equity participation in new insurance companies of up to 26%
for life insurance and 74% for general insurance.
SEBI issued the Securities and Exchange Board of India (Mutual Fund) Regulations, 1993, under
which all mutual funds barring the Unit Trust of India were to be registered and governed. In
recent past, steps have been taken to improve governance practices in the industry, which have
helped the growth of the mutual funds industry.
Reverse Repo Rate:
Repo is the rate at which RBI lends to Bank and Reverse Repo is the rate of interest RBI pays
banks when they deposit funds. These rates are important with which RBI attempts to manage
the economy. The reason for raising these rates was to slow down the rate of which prices are
rising, which is eroding living standards. Borrowing cost and prices of goods and services move
in opposite direction, people tend to borrow less to buy goods, which reduces the demand.
But due to this the holders of fixed income securities and bank deposits would get affected. Since
fund raisers will offer high rates, bondholders will sell, depressing prices, to buy higher yield
bonds. Along with this the Governments interest cost will go up, leaving less for social welfare.
Company HDFC ICICI KOTAK
P/E 26.0 24.1 25
P/BV 3.8 1.8 2.4
CAR (%) 15.10 15.53 19.50
Net NPA (%) 0.59 2.40 2.34